Monday, July 07, 2014

Death spiral. How the power companies can buy time

It’s called “the death spiral” and it’s terrifying power suppliers.

At the moment they are awarded price rises to cover the cost of their spending on cables and substations. If power usage slides (as it has been) they are granted further price rises to ensure they can continue to recover those costs.

It hasn’t been a big problem until now because their customers have had nowhere else to go. Until now.

Energy specialist Lucy Carter of the Grattan Institute outlines the horror scenario for suppliers while launching a new report out on Monday about why we are paying too much for power.

She says network charges account for most of the increase in electricity prices. The carbon tax is small by comparison.

“The risk for the companies is that when people get the option of putting solar panels on their roofs and installing batteries and cutting the cord, demand will fall sharply. The people who end up left on the network will be the only ones left paying.” They will be stuck with extremely high network charges, forcing even more people off the network, pushing network charges higher still. It’s what Ms Carter calls “your death spiral scenario”.

She says it isn’t upon us yet, but if battery storage improves and network costs keep rising it will be.

Part of Ms Carter's proposed solution is for power companies to charge for network costs differently. At the moment customers who put very little strain on the network pay the same fixed charge and the same amount per kilowatt as those whose peak usage necessitates extra spending on high grade wires and substations...

Those peak users account for about one third of the extra spending on infrastructure over the past five years Ms Carter says.

She wants to charge users for the pressure they put on the network rather than for being part of it. Someone who comes home to a McMansion and whacks on all the air conditioners or heaters puts far more pressure on the network than someone who is at home all day using the same amount of power more steadily.

It can only properly happen with smart meters that report usage to retailers. Victoria has them and could adopt the proposal immediately. In other states such as NSW Ms Carter says the ability to levy variable charges could build a business case for suppliers paying to install smart meters.

Her other solution is even bolder: a peak usage warning to be delivered by SMS or broadcast on TV the day before really extreme peak demand due to events such as heatwaves. In France it’s done using a red, white and blue colour code. ‘Red’ means the next day is facing an extreme peak and that for that day only electricity will be more expensive. Throughout the rest of the year users will be given rebates to make sure they are not charged more overall.

The system would only apply in locations where the network was under pressure and the alternative was new infrastructure.

If it was in operation over the last five years the Grattan Institute believes it would have saved $7.8 billion of the $17.6 billion spent on new infrastructure.

Data on household electricity use provided by the Victorian government suggests the change would be unlikely to hit disadvantaged families.

In The Age and Sydney Morning Herald

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